The WWE Network Revamps The Pay-Per-View Revenue Model And Could Add Millions To The Company's Top Line

Summary

The launch of the WWE Network could expand the company's $80 million annual pay-per-view figure to $300 million or more.

If revenue growth estimates are correct, it could inspire other pay-per-view producers like the UFC to launch their own networks.

Cable providers like DirecTV and Dish Network could take a hit to their bottom lines due to the potential loss of a revenue cash cow.

World Wrestling Entertainment (NYSE:WWE) launched the WWE Network in February - its 24/7 pay channel that leverages its huge library of video content and provides original programming not available on network cable - and in doing so is risking its existing pay-per-view revenue for the potential of an even greater return. If it works, the company will hit a home run.

Background

To provide a little background, WWE Network carries a $9.99 per month fee with a 6 month commitment. It's a reasonable cost for the video library alone but the real kicker is that the monthly subscription price includes all 12 annual pay-per-view events that the company puts on including its biggest event Wrestlemania.

WWE is banking on the fact that the revenue the company receives from the launch of the network will outweigh the revenue lost from pay-per-view sales. It's a risk switching to a plan that involves giving away all of your big money events for free but looking beneath the surface suggests that WWE's new strategy is well thought out and the risk/reward tradeoff is worth it.

How WWE makes money with the new model

According to SEC filings, WWE estimates that the network will eventually gain between 2 and 3 million subscribers - half of which are expected to come from international markets like Canada and England which have significant fanbases. While actual numbers aren't yet available, interest for the initial launch a few weeks ago appeared to be strong and given that the network hasn't launched internationally yet that 2-3 million subscriber estimate looks as if it's within reach.

But how do those 2-3 million subscribers replace lost pay-per-view revenue?

Wrestlemania - WWE's primary pay-per-view - costs somewhere in the range of $60-$70 while the remaining monthly events run about $45. Wrestlemania draws about 1,000,000 buys while the other "major" pay-per-views like Summerslam and Royal Rumble draw about 350,000. The remaining monthly pay-per-views draw about 250,000 buys.

After the cable company and others take their share, WWE ends up with roughly a 40% cut of pay-per-view revenue. At $20 revenue per buy, the company earns annual pay-per-view revenue of around $80 million (WWE officially reported $82 million PPV revenue in 2012). A 12 month customer subscription to the WWE Network nets $120 in revenue. If WWE hits even the low end of subscription estimates that $82 million figure turns into approximately $240 million. If they hit the high end, it turns into a real home run. You can begin to understand why WWE would think that a $10 per month subscription could make up for a lost $20 PPV buy.

Short-term concerns

While the strategy seems sound, the results won't be immediate and there are hurdles that must be dealt with first.

WWE is going to need time to get up to that 2 million subscriber number. It's still unclear exactly when the company thinks it will get there and in the meantime could put pressure on earnings. Subscription renewal figures will be important. Subscription numbers during the launch period should be strong as everyone piles on but it will be the number of customers that sign up for the second six month period that will be key.

The current fiasco with DirecTV (NASDAQ:DTV) demonstrates how some of the cable companies might put up a fight as they see the potential extinction of one of its cash cows. DirecTV will need to figure out how much it wants to battle with WWE and whether or not the company wants to carry WWE pay-per-view events at all in the future. If WWE is successful in severing its relationship with DirecTV, it may pave the way for other big pay-per-view event producers - namely, the UFC - to launch their own networks with a similar model to WWE and damage the cable companies' bottom lines even further.

Another issue could lie with the WWE performers themselves. The wrestlers receive a cut of pay-per-view revenue depending on such factors as what their contracts stipulate and how high up on the card they appear. If the PPV revenue model goes away, how will the performers be compensated? Is there a chance that some of the performers will become disgruntled or begin to walk away until the compensation issue is addressed satisfactorily?

Conclusion

The stock price's recent run up from $23 to $30 indicates that the street approves of WWE's plans. Based on the increased price and valuation, the stock appears to be fully valued in the short term. However, the launch of the WWE Network is a definitive long-term positive for the company. As the company digests some of the short-term issues and obstacles, it looks to have established a pioneering revenue expansion plan that should yield WWE significant returns for years to come.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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